The European Central Bank is ready to deploy anything in its monetary policy toolbox if inflation stays too low, its president Mario Draghi has said, despite keeping its monetary policy unchanged following its policy meeting today.

Draghi told a news conference that he and his colleagues expected a prolonged period of low inflation and that if it dragged on too long, action would be taken. He added that printing money - quantitative easing (QE) - had been discussed at Thursday's meeting.

Today’s comments marked a significant shift in tone from last month when the ECB president appeared to set quite a high bar for any action.

Supermario again: The ECB president today strengthened his pledge that he is ready and waiting to take further policy action to head off the risk of deflation

Chris Huddleston, head of money
markets at Investec Corporate and Institutional Treasury said: ‘Mario
Draghi has strengthened his pledge that he is ready and waiting to take
further policy action to head off the risk of deflation.

‘A rising euro and high unemployment could force the ECB to introduce measures, one of which could be negative rates.’

Draghi
emphasised today that any policy shift could be over and above interest
rate moves, saying: ‘The Governing Council is unanimous in its
commitment to using also unconventional instruments within its mandate
in order to cope effectively with risks of a too prolonged period of low
inflation.’

But the ECB
maintained eurozone interest rates at a record low of 0.25 per cent
today, hoping the euro zone recovery will gain strength unaided.

Having
barely reacted to the earlier policy decision, Draghi's comments saw
European stock markets rally and the euro drop to a session low against
the dollar.

Having both
been around 0.2 per cent lower following the ECB rate decision,
Germany’s Dax 30 index gained 0.2 per cent and France’s CAC 30 index
added 0.3 per cent in the wake of Draghi’s comments.

In
London, the FTSE 100 index recovered from a slip lower to tick 0.1 per
cent higher.

Ishaq Sidiqqi, market strategist at ETX Capital said:
‘Super Mario again proves he is a master wordsmith by shaking up
financial markets with rhetoric about talk at the ECB over the
possibilities of employing unconventional easing measures including QE.

‘It
was expected that Draghi would hint at what’s inside the ECB’s
war-chest but as expected, Draghi is relying on his words as a form of
action.

‘What markets are
not comfortable with is that the ECB appear satisfied with this “low
inflation” environment that we are in which if persistent and not
tackled by the use of stimulus, stands to cause damage too – perhaps a
point the ECB have unwisely ignored but will creep up and bite if not
adequately dealt with.’ Sidiqqi added.

Figures earlier this week showed a fall in eurozone inflation to its lowest level in more than four years, and there were fresh indications of pressure on prices from a survey published today.

March purchasing manager index surveys showed that eurozone businesses logged their busiest quarter in three years at the start of 2014 but they did so by slashing prices, underscoring fears that deflation may soon afflict the region.

The eurozone composite PMI dipped to 53.1 in March from February's 32-month high of 53.3, but held above the 50 mark that divides growth from contraction for the ninth month.

IMF boss: Christine Lagarde said yesterday that more monetary easing in the form of lower interest rates or quantitative easing was required in the eurozone.

Survey compiler Markit said the composite PMI number pointed to first-quarter growth of 0.5 per cent which, if realised, would mark the region’s fastest pace of growth since early 2011.

While the recovery in the Eurozone from the sharp economic downturn of 2008 has been led by manufacturing powerhouse Germany, the latest Markit surveys showed it is becoming more broad-based but at the expense of lower prices.

Markit’s output sub-index, a measure of what a firm charges for goods and services they sell, fell to a four-month low of 48.8 in March, down from 49.3 in February.

Chris Williamson, chief economist at Markit said: ‘The final PMI data for March round off the region's best quarter for three years.

‘But the concerns will lie with the price data. The weakening price indices will stoke fears that deflationary forces are intensifying amid weak demand and near-record unemployment.’

Euro zone inflation fell to just 0.5 per cent last month, its lowest since November 2009 and well below the ECB's 2 per cent target.

The ECB last cut its main interest rate in November after a surprise drop in inflation in October to 0.7 per cent.

The International Monetary Fund’s managing director Christine Lagarde yesterday urged the European Central Bank to do more to combat sluggish growth and worryingly low inflation in the eurozone.

Speaking ahead of next week’s Spring Meetings of the IMF and World Bank she said: ‘There is the emerging risk of what I call low-flation, particularly in the euro area. A prolonged period of low inflation can supress demand and output and supress growth and jobs.’

Lagarde said more monetary easing in the form of lower interest rates or quantitative easing was required in the single currency bloc to bolster demand.